FocusChina may step up PVC exports as overcapacity looms

27 January 2010 07:23[Source: ICIS news]

By Ng Hun Wei and John Richardson

SINGAPORE (ICIS news)--China may eye its neighbouring countries in Asia as market for its excess polyvinyl chloride (PVC) in the long-term given an imminent overcapacity, industry sources said on Wednesday.

The country’s eventual transformation into a net exporter from an importer of the material would pose a massive challenge to other producers of the material in northeast Asia, which looks to ?xml:namespace>China to support their PVC production, they said.

But Chinese PVC producers may have to face prohibitive tariffs from a number of export markets, industry sources said.

Other countries may put up trade barriers to prevent an influx of Chinese material that would be detrimental to their domestic industries, they said.

“China’s export prowess is well-known throughout the world. Chinese PVC exporters can expect to come up against a slew of anti-dumping duties in most markets,” said a PVC producer.

PVC is mainly used for manufacturing of pipes, with demand for the material dictated by activities in the construction sector, particularly, housing.

Japan, South Korea and Taiwan would increasingly struggle to find a home for a collective 2.4m tonne/year of surplus capacity in polyvinyl chloride (PVC) as a result of aggressive growth in Chinese production, based on a recent report by petrochemical consultancy firm - ChemSystems.

“This output (from Japan, South Korea and Taiwan) was previously exported to China, but as China has become self-sufficient in PVC, these countries have been forced to market their product further afield,” stated the company in its report titled “Vinyls Chain Market Dynamics”.

Compounding the problems for the northeast Asians is ongoing capacity expansions in north America. This new production will be mainly targeted for exports because of the weak construction sector in the US, based on the report. ChemSystems said that capacity expansion in China over the 2003-2008 period was almost 90% of the pace of global capacity growth.

“Despite legitimate environmental concerns, relating both to massive carbon emissions and mercury pollution, the development of acetylene-based capacity in China shows no sign of slowing,” the petrochemical consultancy firm said.

China's PVC capacity was expected to hit 20m tonnes this year from 17.5m tonnes in 2009, market sources said. Over a five-year period spanning 2003-2008, China more than tripled its PVC capacity to 15.81m tonnes, based on industry statistics, but production growth in absolute terms were a lot less impressive at less than 50% over the same period.

Producers were running their plants at just half their stated capacity last year, market sources said. Actual production for the whole of last year would not be so different than in 2008, they added.

Coal/acetylene-based PVC plants in China saw big output cuts last year because the drop in oil prices made the ethylene-based route more economic, the ChemSystems report added.

Demand for most petrochemicals collapsed last year as the global economy was in the throes of recession. China’s domestic demand, however, held up on the strength of the government’s massive fiscal stimulus package.

“The picture from inside China is not that rosy,” said a PVC trader, adding that the domestic industry was undergoing tough times.

Consolidation might help stabilise the country’s PVC industry, which comprised 90 players in 2008, with the top 10 companies accounting for more than half the total production capacity, industry sources said.

“Small PVC producers are unable to withstand market fluctuations as easily as bigger producers. This is one reason why Chinese PVC operating rates are so low,” said a Chinese PVC producer.

“There is always a nagging feeling that the Chinese PVC industry might have to consolidate further before it stabilises,” said a PVC trader based in China.

The average capacity of a PVC plant in China is less than 100,000 tonnes/year, compared to 150,000 tonnes/year in Japan and 300,000 tonnes/year in the US, according to industry data.

The efforts of the Chinese government to restrict construction and expansion of less efficient, environmentally hazardous plants has prevented construction of sub-scale projects but this has had little impact on the pace of development in China’s PVC industry, ChemSystems said in its report.

PVC production in China was largely based on coal, which is being encouraged given that the country has this natural resource in abundance although its use was widely considered as environmentally harmful.

It said that other regions have increasingly adopted a PVC production process based on ethylene, a cleaner but more expensive chemical.